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Ricardo Marty
adobe post 2016
on Jul 6, 2015 at 3:00:43 pm
Last Edited By Ricardo Marty on Jul 6, 2015 at 3:03:09 pm

Tim Green (Adobe): Many software companies have been moving to a subscription-based business model in recent years, and Adobe Systems (NASDAQ:ADBE) is no exception. Best known for its ubiquitous creative software like PhotoShop and Illustrator, Adobe has now largely completed the transition away from perpetual software licenses, and at the end of May, the company boasted 4.6 million subscribers to its Creative Cloud offering.
Adbe Logo

Image: Adobe

While this transition was taking place, Adobe's financial results deteriorated, thanks to revenue that would have formerly been recognized immediately being spread out over the length of a subscription. Both revenue and earnings are now growing again, and Adobe expects non-GAAP earnings to rise to $3 per share in fiscal 2016, up from just $1.29 per share in fiscal 2014.

With the stock trading at around $80 per share, Adobe's valuation may not seem too unreasonable, with a forward P/E ratio of about 27 based on that $3 per share earnings target. But Adobe's strong earnings growth is deceptive for a couple of reasons. First, the company's GAAP earnings, which don't exclude stock-based compensation, will be significantly lower. Coming into this year, Adobe expected non-GAAP EPS of $2.05 and GAAP EPS of just $1.20 for fiscal 2015, and if this relationship stays the same in 2016, on a GAAP basis Adobe will only earn about $1.75 per share. This puts the forward P/E ratio at a much loftier 46.

Perhaps a larger issue, though, is that Adobe's peak GAAP earnings over the past decade was just $1.66 per share, and once Adobe gets back to this level, growth is very likely to slow dramatically. Little has changed about Adobe's core business except the way that customers pay for it, and while Adobe has invested in its digital marketing business, it doesn't have the same dominance there as it does in creative software. Once Adobe's results fully recover from the transition to a subscription-based business model, growth is very likely to slow. There's a reason why Adobe's long-term financial targets don't go past 2016.

Because of this, Adobe's valuation makes little sense. The strong growth that the company expects to report through next year can't be sustained in the long-run, and investors will be in for quite a shock when this growth disappears.


http://www.fool.com/investing/general/2015/07/03/3-tech-stocks-wall-street-...


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Joseph W. Bourke
Re: adobe post 2016
on Jul 6, 2015 at 4:34:30 pm

While it's an interesting blog post, Tim Green, as a financial blogger for Motley Fool, seems to have a spotty track record at predicting success/failure of stocks. His accuracy is currently 59 percent - which is pretty close to a crapshoot.

Joe Bourke
Owner/Creative Director
Bourke Media
http://www.bourkemedia.com


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Chris Pettit
Re: adobe post 2016
on Jul 7, 2015 at 3:58:36 am

[Ricardo Marty] "Little has changed about Adobe's core business except the way that customers pay for it, and while Adobe has invested in its digital marketing business, it doesn't have the same dominance there as it does in creative software. Once Adobe's results fully recover from the transition to a subscription-based business model, growth is very likely to slow. There's a reason why Adobe's long-term financial targets don't go past 2016."

Those of us who have been saying this for a long time are either right. Or we're wrong.

We'll see eventually wont we?


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Gary Huff
Re: adobe post 2016
on Jul 8, 2015 at 4:19:21 pm

[Chris Pettit] "We'll see eventually wont we?"

1 year? 2? 5? 10?


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Chris Pettit
Re: adobe post 2016
on Jul 8, 2015 at 4:24:01 pm

[Gary Huff] "
1 year? 2? 5? 10?"


It's a good question. Andrew has suggested that they may have a 5 year plan, that sounds reasonable to me.


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Gary Huff
Re: adobe post 2016
on Jul 9, 2015 at 2:50:38 am

[Chris Pettit] "Andrew has suggested that they may have a 5 year plan, that sounds reasonable to me."

So two/three years from now?


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Chris Pettit
Re: adobe post 2016
on Jul 9, 2015 at 3:11:13 am

[Gary Huff] "So two/three years from now?"

Is that a serious question? Most probably not. However:

Yes, we're going to find out (reasonably soon) if subscriptions simply to support software companies at the expense of a great many of their own customers will prove to be a good business idea or not. For them and for us. And for new competitors.


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Gary Huff
Re: adobe post 2016
on Jul 9, 2015 at 4:36:42 pm

[Chris Pettit] "Is that a serious question? Most probably not."

Actually, it is. Because you need to set a time frame for when it becomes apparent or not if your concerns were completely unwarranted all along.

I mean, do you still expect to be taken seriously if you want to keep talking about how everything's on the verge of going belly up in 2020?


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Chris Pettit
Re: adobe post 2016
on Jul 10, 2015 at 11:51:53 pm

[Gary Huff] "I mean, do you still expect to be taken seriously if you want to keep talking about how everything's on the verge of going belly up in 2020?"

Nobodies going belly up, and nobody has suggested that anyone is going belly up.

But your point is well taken, there certainly is a time limit on how long it makes sense to even comment on these issues. At a certain point it really will seem silly to speculate on Adobe making adjustments to policy in the absence of said adjustments. And no, I would not expect to be taken seriously predicting market consequences for Adobe's decision if it was 2020.

If Adobe continues to increase or at least sustain a stable subscription base, and they continue to be the standard for certain types of creative work, and they have returned to actually making profits instead of simply swimming in gross revenue and stock price alone, then I would not expect to be taken seriously by predicting anything except the status quo.

But it's 2015, and net profits are down. And they just released a version FULL of bugs. And CC AE is not significantly faster than CS6.

Oh, and other companies are starting to offer serious alternatives....


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Billy Payn
Re: adobe post 2016
on Jul 9, 2015 at 10:21:53 pm

Time frame nothing to do with it, don't want to rent now, can't see myself wanting to rent in 5 or even 10 years, so I won't.



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Gary Huff
Re: adobe post 2016
on Jul 10, 2015 at 2:34:39 am

[Billy Payn] "Time frame nothing to do with it, don't want to rent now"

We get it, you don't want to "rent". This really exactly doesn't have to do with the subject at hand, now does it?


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